After five months of shopping for his first home, Greg Ridenour was tired of having his offers turned down.
One of numerous buyers competing for moderately priced homes in the Chicago area, he was outbid twice, even though he’d offered more than the asking price.
“I was anxious to get it over and I wanted to lock in a 4.5 percent interest rate,” said Ridenour, 32.
So in May, when he and his girlfriend Brianna Sandoval found a townhouse they liked in Minooka, Ridenour and their real estate agent devised a strategy for getting around a part of the home-buying process that is proving increasingly thorny for buyers: the appraisal.
When making their bid, which was $11,000 over the home’s list price, the couple offered to throw in $5,000 of their own cash if the appraisal on the home came in low. The cash sweetener worked, and they emerged as the winning bidders, beating out 10 other offers.
While many homebuyers think of appraisals as a blip on the way to buying property, real estate agents say the home valuation process has become a high hurdle. For a variety of reasons, appraisals often peg home values at below-market rates in hot areas of Chicago’s real estate market. Houses are selling on average in just 42 days and prices on moderate-priced homes are often being bid up. For buyers counting on bank loans, the low appraisals can kill a deal. Most lenders require appraisals and refuse to lend amounts above the appraised value. The appraisals are also a problem for sellers, who don’t find out until weeks after they’ve accepted an offer that a low valuation has scuttled the buyer’s loan, and possibly undermined the entire deal.
The situation is shutting some buyers out of the market and allowing those who can pay entirely in cash, and without the constraints of a required appraisal, to walk away with the deals. To avoid the prospect of a deal falling through, some sellers are even accepting all-cash offers that are less than offers being made by buyers dependent on bank loans.
In the Chicago market, real estate agents say inaccurate appraisals are especially problematic for homes priced in the $100,000 to $300,000 range, a tier of the market that often attracts young buyers seeking a first home. With few of these homes on the market, competing buyers often offer more than sellers are asking, causing home prices to rise fast.
“The appraisers aren’t keeping up with the rising prices,” said Jeff Gregory, the real estate agent who worked with Ridenour.
As a result, banks are denying loans that would be appropriate for current market conditions, and deals are falling through, said Gregory, owner of Realty Executives Success and chairman of Midwest Real Estate Data.
Problem appraisals have become an issue nationally as well as in the Chicago area, and not only because homes are appreciating after the housing crash that took hold in 2008. There is also a shortage of appraisers, which means appraisers may not know an area well or may analyze a property too quickly without recognizing appropriate nuances.
A combination of a shortage of appraisers and inefficient appraisals is “killing deals and giving a big advantage to cash buyers over borrowers in the housing market,” the Urban Institute said in a recent report. The researchers suggest overhauling the appraisal process so that more people can get bank loans and lift the housing market’s recovery.
The Appraisal Foundation, which sets standards for the industry, is working to enlist more people as appraisers and encouraging them to use technology to gather up-to-date data.
“Appraisers are aging,” said Jason Goldberg, founder of Valucentric, a national appraisal firm with an office in Deerfield. “The average age is 58 to 60, and they are used to a different time when they didn’t have the benefit of technology.”
Beyond a shortage of appraisers, however, there are attitudes left over from the housing crash that cause dysfunction, Goldberg said.
“Lenders lost billions and don’t want it to happen again,” Goldberg said. Lenders want appraisers to be conservative with the values they assign to homes, and appraisers don’t want to take chances, he said.
“When a bank is involved, appraisers are conservative,” said Loretta Alonzo, a Chicago area Century 21 real estate agent. “Appraisers now don’t want to be called on the carpet for their appraisals.” As a result, “a lot of buyers are losing out.”
Gregory and other real estate agents are finding creative ways to help buyers with bank loans stay in the hunt. Some are adopting Gregory’s strategy of encouraging potential buyers to offer to make up any shortfall in the appraisal with their own cash to pay to the seller.
Real estate agents also have the option of challenging an appraisal that seems inaccurate, although many say that rarely works.
Homebuyers have the additional option of leaving one bank and going to another. By starting the loan process anew, a different appraiser will be assigned to evaluate the home’s value — perhaps providing a different valuation. But each appraisal involves fees and extra delays, so that approach is rarely used.
Goldberg, speaking at a real estate gathering in Chicago last month, told agents that if they want to refute an appraisal, they should put the evidence for a higher home value in a letter, sign it, and have the managing broker for their firm sign it. The letter should then be submitted to the chief appraiser or the firm’s head of risk management, with a request that the appraiser who did the report be contacted.
“Point out factual errors,” said Goldberg. “Don’t yell.”
But a better approach than trying to fix an appraisal after the fact, he said, is to contact an appraiser before he or she starts the appraisal, or accompany the appraiser at a home.
“Show the appraiser why the home is selling above the list price,” Goldberg said, by pointing out differences from other comparable homes that sold within the last few months — perhaps patios, fireplaces, renovations, proximity to a top school or a distance away from a busy street.
“The appraiser wants protection,” said Goldberg. “Send a PDF for his file.”